Davis Plan on Vivendi Cuts Out Penalties

Oil tycoon Marvin Davis thinks he's found a way to give the slip to his old foe Barry Diller in their battle for Vivendi Universal's entertainment empire.

In a series of recent discussions with Vivendi's French executives, Davis has proposed a way for the company to circumvent restrictions negotiated by Diller that could cost it hundreds of millions of dollars in tax and other penalties should it sell the U.S. entertainment businesses, according to sources familiar with the talks.

Until now, the conventional wisdom has been that Diller thus holds the upper hand in Vivendi Universal's efforts to sell or spin off its Hollywood studio, theme park and music operations. Diller currently is co-chief of the U.S. entertainment group.

But Davis' legal team believes it has found a way to go above Diller's head. It has proposed buying an obscure holding company that actually controls the entertainment assets, sources said. In this way, the Davis team has argued, the restrictions negotiated by Diller farther down the corporate chain would not be triggered, sources familiar with the discussions said.

Those provisions were put in place last year when Diller combined the film and TV assets of his USA Networks with Vivendi Universal's studio and theme parks, creating a new entertainment company.

One of the triggers allows Diller's USA Interactive Inc. to block the sale of entertainment assets unless Vivendi pays it millions of dollars in taxes. Another would force Vivendi to reinvest half of any sale's proceeds into the partnership.

What's more, should Diller decide to bail out of the partnership, he can exercise a "put" option requiring Vivendi to pay at least $275 million for his stake. Diller has a 1.5% ownership in the partnership; USA Interactive owns 5.4%.

Representatives for Davis, Diller and Vivendi declined to comment.

Legal experts, however, say the kind of deal proposed by Davis is not uncommon.

"Generally, you can structure a transaction in order to meet the requirements you want it to meet. There's nothing wrong with that," said Los Angeles tax attorney Carol Perrin of Greenberg Traurig.

"It would appear, on the face of it, that it would not trigger any of those provisions," she said of the Davis proposal.

The restrictions have been the subject of intense negotiations between Diller and Vivendi's chief executive, Jean-Rene Fourtou, who wants to shed assets to revive Vivendi's finances after the firm nearly filed for bankruptcy last summer.

Fourtou and Diller have disagreed over how much in tax liabilities the company would be forced to pay if it sells to a third party, with estimates of $400 million to $2 billion.

Davis and a group of investors have offered to buy the Universal properties for nearly $20 billion or pay $13 billion for a controlling stake.

Which way Fourtou will go remains uncertain.

Fourtou made it clear to Davis at a meeting in Paris last week that although he was open to further talks, he wanted to consider offers from other potential bidders, sources said.

And despite Davis' offer, with its promise of avoiding the costly tax penalties, Fourtou is continuing to negotiate with Diller, believing that it is in Vivendi's best interest to work out a deal with the mogul, sources said.

Davis and Diller have been at odds since their days at the 20th Century Fox studio, which Davis owned in the early 1980s.

Tensions have resurfaced of late as Davis has questioned Diller's ability to juggle his role at Vivendi and his job as head of USA Interactive, a sprawling electronic commerce company. Davis has made it clear that he would oust Diller if his bid were to succeed.

Diller has fired back, dismissing Davis' offer as not serious and calling him "fat" at an investment conference. Diller later apologized for the remark.

In any case, Diller is said to be preparing his own plans for Vivendi's U.S. assets. Those plans include a possible spinoff of the Universal businesses into a separate firm, a portion of which would be sold to the public and the rest owned by private investors including Vivendi and Liberty Media Corp.'s John Malone.

"It's impossible to handicap this," said Michael Nathanson, an analyst with Sanford C. Bernstein & Co. "It's all about negotiations."